KRA’s solution to tax evasion is punitive to new companies

The declaration by the High Court earlier this week that the minimum tax provisions were unconstitutional brought to the fore some of the fundamental dysfunctions of our tax structure and its negative consequences on Kenyan businesses.

Introduced in the June 2020 Finance Act, the impugned provisions introduced a new Section 12D into the Income Tax Act under which businesses other than those exempted by the Act were required to pay one per cent of their gross turnover as “income” tax.

This tax appeared to target small and medium enterprises many of which have stayed below the tax radar as they hardly ever file returns or disclose any profits.

While KRA’s problem in accessing many of these entities is understood, the solution they rendered was not only unlawful but manifestly unfair.

Tax law and policy anticipates that income earners will be taxed from their profits and not from the monies that pass through their hands.

While the minimum tax requirements would ferret out those that were hiding from KRA yet were making profits, it would also punish many entities, especially startups, which though having large turnovers, were hardly making profits.

Indeed, for many young businesses, the turnover was capital investment and not business income. It would appear that KRA was taking the easy way out instead of investing in the more complex work of seeking those avoiding its tentacles.

In giving its judgement, the court reprimanded KRA for adopting a system which even the innocent were ensnared and unlawfully penalised instead of devising ways in which tax evaders could be identified and lawfully dealt with.

The minimum tax case brought to my mind a viral complaint by a young Kenyan entrepreneur last year who complained vehemently how KRA and various other regulators had milked her startup water business dry through demands of numerous taxes, levies and fees.

It also reminded me of complaints I have heard from a host of young innovators who have opted to move many of their operations and their funding to America and Europe where the tax regimes are more accommodating of infant enterprises.

Many of them believe that the Kenya taxman is so focused on squeezing the highest amounts tax from enterprises that he is not concerned with the impact on the survival of the businesses or the greater benefit these businesses would bring to the economy.

Consequently, any startup obtaining funding for its business would rather incubate investor’s funds in the West than bring them within the remit of a voracious taxman.

The effect of that is that even though Africa, and Kenya in particular, is the hub of innovation, with hundreds of millions of dollars invested in Kenyan companies every year, little of that money stays in this economy but is instead held in Western banks assisting Western economies. This is the new “dollar drain” analogous to the traditional brain drain.

Had these funds been held here, they would have shored our forex reserves and improved our money supply for the benefit of the wider economy.

These issues have been raised on numerous occasions and are stated and restated in broad government policy, including most recently in the impugned BBI.

But at an operational level, the taxman appears more excited about meeting targets than on the broader welfare of the business sector and the economy.

One wonders what ails KRA; is it that policy-makers are operating in a silo world where as long as the goose lays the golden egg, it doesn’t matter if it is feathered to death?

One hopes that there would be more innovative macro thinking about how to ensure that a punishing tax regime does not kill our economy even as KRA ensures it nets all those that are illegally escaping its nets.